Using the 2 Stage Free Cash Flow to Equity, Constellation Energy fair value estimate is US$322
Current share price of US$188 suggests Constellation Energy is potentially 42% undervalued
The US$183 analyst price target for CEG is 43% less than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Constellation Energy Corporation (NASDAQ:CEG) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$2.86b
US$3.20b
US$3.20b
US$3.68b
US$3.93b
US$4.13b
US$4.29b
US$4.45b
US$4.59b
US$4.72b
Growth Rate Estimate Source
Analyst x2
Analyst x2
Analyst x2
Analyst x2
Analyst x2
Est @ 4.89%
Est @ 4.11%
Est @ 3.56%
Est @ 3.18%
Est @ 2.91%
Present Value ($, Millions) Discounted @ 6.0%
US$2.7k
US$2.9k
US$2.7k
US$2.9k
US$2.9k
US$2.9k
US$2.9k
US$2.8k
US$2.7k
US$2.6k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$28b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 6.0%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$131b÷ ( 1 + 6.0%)10= US$74b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$102b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$188, the company appears quite undervalued at a 42% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Constellation Energy as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.0%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Constellation Energy
Strength
Debt is well covered by earnings.
Balance sheet summary for CEG.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Electric Utilities market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Trading below our estimate of fair value by more than 20%.
Threat
Debt is not well covered by operating cash flow.
Annual earnings are forecast to grow slower than the American market.
Is CEG well equipped to handle threats?
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Constellation Energy, we've put together three fundamental elements you should consider:
Risks: Be aware that Constellation Energy is showing 2 warning signs in our investment analysis , you should know about...
Future Earnings: How does CEG's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
关键见解
使用两阶段的股本自由现金流,Constellation Energy的公允价值估计为322美元
目前188美元的股价表明Constellation Energy可能被低估了42%
分析师对CEG的目标股价为183美元,比我们对公允价值的估计低43%
今天,我们将简单介绍一种估值方法,该方法用于估算Constellation Energy Corporation(纳斯达克股票代码:CEG)未来的现金流并将其折现为现值,从而估算该公司作为投资机会的吸引力。这将使用折扣现金流 (DCF) 模型来完成。听起来可能很复杂,但实际上很简单!
公司可以在很多方面得到估值,因此我们要指出,DCF并不适合所有情况。任何有兴趣进一步了解内在价值的人都应该读一读 Simply Wall St 分析模型。